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Risk-induced discounting

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  • Marc St-Pierre

    (University of the South)

Abstract

We establish a direct connection between time preference and risk about an attribute (health) of the instantaneous utility function. In doing so, we derive a risk-induced discount function that corresponds to a normalized expectation of that attribute. We provide several results characterizing this risk-induced discount function depending on the stochastic properties of the risk, which we model as a discrete Markov process. When it is well-defined, which we refer to as full approximation, the risk-induced discount function coincides with exponential discounting if the Markov process is stationary. However, a slight perturbation of the beliefs can trigger time-inconsistent discounting. When considering non-stationary Markov processes, time-inconsistency also emerges in situations where individuals’ beliefs change in a non-anticipated fashion over time, as exemplified by quasi-hyperbolic discounting. Results are illustrated via several applications.

Suggested Citation

  • Marc St-Pierre, 2017. "Risk-induced discounting," Theory and Decision, Springer, vol. 82(1), pages 13-30, January.
  • Handle: RePEc:kap:theord:v:82:y:2017:i:1:d:10.1007_s11238-016-9555-y
    DOI: 10.1007/s11238-016-9555-y
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    References listed on IDEAS

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